Poor Paul Krugman

People like to caricature PK as some sort of deficit nut. The crazy professor that runs around screaming “Deficits don’t matter, ever“, or “Keep printing that money“. Or, more recently, that he’s a crude Keynesian.

So, I’m not going to do any analysis here, just post a few quotes from the good doc and you tell me if this is “crude” or, as Jeffrey Sachs and Joe Scarborough put it:

Dick Cheney and Paul Krugman have declared from opposite sides of the ideological divide that deficits don’t matter, but they simply have it wrong. Reasonable liberals and conservatives can disagree on what role the federal government should play yet still believe that government should resume paying its way. It has become part of Keynesian lore in recent years that public debt is essentially free, that we needn’t worry about its buildup and that we should devote all of our attention to short-term concerns since, as John Maynard Keynes wrote, “in the long run, we are all dead.” But that crude interpretation of Keynesian economics is deeply misguided; Keynes himself disagreed with it.

Here’s what Paul Krugman has to say:

I wish I could agree with [the view that deficits never matter, as long as you have your own currency] […] But for the record, it’s just not right.

The key thing to remember is that current conditions […] won’t always prevail […] But this too shall pass, and when it does, things will be very different.

So suppose that we eventually go back to a situation in which interest rates are positive, so that monetary base and T-bills are once again imperfect substitutes; also, we’re close enough to full employment that rapid economic expansion will once again lead to inflation […]

Suppose, now, that we were to find ourselves back in that situation with the government still running deficits [and] that for whatever reason, we’re suddenly faced with a strike of bond buyers — nobody is willing to buy U.S. debt except at exorbitant rates. […]

Well, the first month’s financing would increase the monetary base by around 12 percent. [The price level would rise] roughly in proportion to the increase in monetary base. And rising prices would, to a first approximation, raise the deficit in proportion.

So we’re talking about a monetary base that rises […] 400 percent a year. Does this mean 400 percent inflation? No, it means more — because people would find ways to avoid holding green pieces of paper, raising prices still further.

I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk […] can make that point disappear:if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.

[…] But the idea that deficits can never matter, that our possession of an independent national currency makes the whole issue go away, is something I just don’t understand.

Correct me if I’m wrong, but the professor sounds like a Very Serious Person.


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